Some weeks back, I received a call from my school friend asking me to suggest an Insurance plan which he can buy for his just born child. He was even talking about some children’s plan which a relationship manager had just pitched to him! Probably with rising cost of education, career and future uncertainties in the life of kids and ever increasing troubling period for parents due to job uncertainties force them to get lured into buying these “useless products”. Coming to the point, I had to make an effort to help him understand that there is no such children plan in the market but it is just a marketing gimmick. Ko

A simpler and straight to the point method would be to have a life cover of 10 to 15 times of one’s annual earnings. Let me tell you this is just a thumb rule and cannot be applied to everyone. Life insurance is one such financial product which takes care of your near and dear ones when you’re not around them. This product should never be treated as a money making or an income generating instrument which is usually happening through ULIP and other so called guaranteed plans.

Let’s say you have multiple life insurance policies, but then you should question yourself are you adequately insured? You should know this since in India the majority of the people are still uninsured or underinsured. Just remember a small life cover will not serve the purpose of those who are dependent on you. So, as per the thumb rule explained above, a sum insured should be equal to an amount which should fetch a regular income for the dependants of the insured so that they are able to maintain their lifestyle even if you are not around.

There is also a need based approach through which one can arrive at the appropriate sum insured that one can opt for but then it takes a more customized approach based on one’s assets and liabilities in life.

So in a nutshell, opt for a plain vanilla term plan without any riders added to it so that you get the cheapest available form of insurance in the market. Do not buy a complicated and low yielding ULIP and money back plan available in the market. After all, life insurance is not about making money but about buying peace of mind and taking care of your loved ones when you are not around.

This is tale of Rina, and Her Financial Dilemma a hardworking professional, had been diligently saving and investing in mutual funds for years. She knew the importance of growing her wealth and had heard all about SIPs (Systematic Investment Plans). However, one day, she found herself in a tight spot—she urgently needed cash to cover an unexpected expense.

In a rush, Rina decided to withdraw her funds from the mutual fund. But to her dismay, she had to sell her investments at a 20% loss! It was a hard pill to swallow, especially when she realized that the loss could have been avoided with a bit of foresight.

Enter the SWP: A Missed Opportunity

Rina’s situation might have turned out differently if someone had told her about the Systematic Withdrawal Plan (SWP). While SIPs are all about growing your money over time, SWPs work in the opposite way—they allow you to withdraw a fixed amount from your mutual fund at regular intervals. Whether you need money monthly, quarterly, or even yearly, SWP can be tailored to your needs.

How SWP Could Have Helped Rina?

Had Rina set up an SWP, she could have planned her withdrawals more strategically. Instead of selling a large chunk of her investment at a loss, she could have withdrawn smaller, regular amounts. This disciplined approach could have saved her from the panic and ensured she had money when she needed it, without taking a big hit.

The Benefits of SWP:

• Disciplined Investing: With SWP, Rina would have automatically redeemed some units each month to cover her expenses. This would have protected her from making impulsive, large withdrawals during market downturns, minimizing her losses.
• Cost Averaging: SWP would have helped Rina benefit from rupee cost averaging, meaning she would have gotten a more balanced return over time, rather than relying on the market’s performance at a single point.
• Fixed Income: With SWP, Rina could have ensured a steady stream of income, which would have been especially helpful in managing her monthly expenses or even planning for her retirement.
• Tax Efficiency: Each withdrawal in SWP is treated as a mix of capital and income. Rina would have paid tax only on the income portion, not the entire withdrawal, making it a more tax-efficient option compared to other investments like fixed deposits.

An Example to Ponder

Consider Mr. A, who invested ₹15 lakhs in a mutual fund. Over time, it grew to ₹16.5 lakhs (a 10% increase). If Mr. A withdrew ₹1.5 lakhs at the end of each year using SWP, only a small portion would be considered taxable income. The rest would be treated as a return of capital, resulting in significant tax savings compared to a fixed deposit.

The Moral of the Story

Rina’s experience teaches us the importance of planning and knowing the tools available to us. Had she known about SWP, she could have avoided her 20% loss and managed her finances more effectively. The next time you set financial goals, especially as you near retirement or other important milestones, consider using an SWP to withdraw your funds wisely.

Remember, it’s not just about how you invest, but also how you withdraw your money. And with the right plan, you can avoid unnecessary losses and enjoy the fruits of your investments.

One of my friends recently asked me if investing into a small cap fund pays rich dividends? He had done his part of some quick online research and browsed through the historical returns of quite a few top performing funds in this category. He was quite naturally drawn by looking at handsome returns paid by few of the fund houses

Let me keep it simple for all of you and get straight to the point. I would say don’t get tempted by small-cap funds as they are not meant for everybody. Confused are you? Don’t be.

These funds are suited for somebody who is willing to take risk (when I talk about risk please understand that these funds will give you a very bumpy ride); The principles you need to follow are – keep investing into these funds regularly and do not turn finicky when you see the investment value declining steadily for a prolonged period of time. These small cap funds usually start rewarding you usually after five-seven years because that is when investing in these funds becomes extremely rewarding. So, if you don’t have that stomach and if you don’t have that heart, don’t even think about it. Most investors can do without investing in a small-cap fund. Now, the choice is yours.

My investment portfolio is doomed!! All my investments are at an all-time low!! Shall I exit the market!! Shall I book the loss and move out of the market invest more!! Questions keep coming to me day in day out ever since we came across this market mayhem that had started in Mar 2020. This pandemic is threatening to impact the global economy on a larger scale. So yes, what should we actually do? People have been asking me the same question umpteen number of times. I would say of course, things will get worse, before the dust will settle down and things starts to stabilise and get better. However, the basics of the life, the world dynamics will not change.

Let us look deeper into the history – The Spanish flu pandemic of 1918, the deadliest in history, infected an estimated 5 crore people died worldwide—about one-third of the planet’s population—and it claimed the lives of 1.8 crores Indians. That disease was far more worser than the current COVID19!

Then we had the great depression of 1929. However, one fact that remains constant was no matter how disastrous the impact on market was, it was short-lived. Remember, life moves on. People live their daily lives – they work; they eat; they move. If we look at the last 25 years have been a great education for all of us who invest in the stock market. It is not that this is something new. I still recall the days of 2008 when the market crashed after the Lehmann Brothers fall back and global recession gripped the market across the globe.

What can we expect now? The obvious answer is that we do not know what to expect. The impact could be deep but short, or it could be opposite. Some industries will be impacted to a great extent like the aviation and travel industry – some might have one kind of an impact, some another. Some will recover quickly. Some might cut off or stay away from the South East Asian markets, some will try to find ways to improvise and become self-reliant. So, whatever I am saying now all hints at uncertainty, the markets will dwindle and may drop by 30 to 50% or may be greater. No one knows at this point of time and remember this is not uncommon this had happened in year 1987, 1992, 2001, 2008 and so on.
One useful thing to do would be to look at past declines in stock markets and see what happened subsequently. The question we should be asking ourselves is how long it took for the market to bounce back? Or I should say how much time it took for the market to bounce back and recover from a deep shock? On an average 18 to 24 months!! Are you surprised? You should be but if you look at the market history that’s how quickly market has recovered. For more details refer to the several websites which will provide you the necessary stats and you can see for yourselves. What would you construe out of this am I saying to you that equities would have recovered one or two years from now? I would say the chances of a bounce back are strong.

Of course, in times of a great crisis everything looks dark. Human psychology, the media, the newspapers, business news everywhere the pessimism starts dragging you to the core of nothingness. As in every crisis, managing one’s psychology is important. Yes, there will be slowdowns and recessions but a bounce back is inevitable. This brings us to the real question: what should you actually do? The answer is the same that it ever was: Stay put, if you are equity investor buy quality stuffs, but please stay invested do plan your emergency kits (funds) as I always keep stressing upon and a medical insurance cover. In fact, this is the greatest time to buy quality stocks. Let’s stay optimistic.

In such challenging times like this one would often question me why am I Still talking about personal finance? Well that’s the sole reason I am here for, Right?

So let’s begin there can never be a straightforward answer to this question of rebalancing. I have time and again tried to familiarize people with this idea but it seems it’s too difficult a concept to understand for them. So to make it easier for them – to rebalancee ones portfolio you would require: – to frame a rule on your own as to what your asset allocation will be and secondly at what periodicity (time period) it should be re-balanced?

As a thumb rule rebalancing should be done after 1 year, the reason is obvious it will be more tax-efficientfor you. Take a look at your asset allocation every 1 year and if it changes by more than 5%, rebalance it; otherwise not. But resist your temptation to re-balance every now and then because you might incur transaction costs and taxesas applicable.

If you are investing through the SIP mode in the mutual funds, re-balancing should be done based on the value of your portfolio. Just in case you find it difficult to calculate your portfolio create one online (many websites allow you to create your own portfolio). Let’s assume your current asset allocation is 75% in equity and 25% in debt. Now, let us assume after a year, you find that your equity part has gone up by 20% and debt is up by 10%, and consequently your overall portfolio now consists of say 85% equity. Then, you should either stop your SIP for a few months or (you can enroll for 1 year period SIPs on a regular basis) and make larger investment in debt instruments. This way you will be able to rebalance without selling or redeeming any investment, and avoid any tax implications. Before I conclude, Stay Calm, Stay safe, Stay Healthy.

When it comes to taxes a common person always tries to either evade this topic or thinks about making the last minute investment in the February and March just when your employer asks for investment proofs. That’s it chapter closed. Thank you.

Yes, I do agree that Income Tax is a complex subject and a dreaded one for many. The intent of writing this short paragraph is to familiarise you with the taxation aspects of only that income (or losses) that you may have from your investments, and the ways and means available to use your investments to reduce the amount of tax you have to pay. However, I would still suggest that you better consult a tax advisor in this regard.

Paying Taxes on Investments

Mutual funds and stocks are capital assets, and gains from the purchase and sale of these instruments is called capital gains. If you lose money on them, then these are called as capital losses. Please do remember that Capital gains or losses occur only when you actually sell an investment. Another aspect is the dividends paid by fund houses or shares is called as dividend income, while any interest earned from a bank/post office or other such deposits is called the interest income

Now let us understand the Taxes and their treatment.

Capital gains tax on mutual funds
Non-equity funds are treated as a long-term capital asset if held for more than three years. Long-term capital gains tax is payable at 20 per cent with indexation benefit on the realised gains.

Gains on investments in non-equity funds held for up to three years are added to income and taxed as per the applicable slab rate.

Equity funds are treated as a long-term capital asset if held for more than 1 year. The long-term gains are taxed at 10 per cent without indexation. Short term capital gains from equity funds are taxed at 15 per cent.

Let us understand this further: – Suppose you have made an investment in a non-equity fund, in the year 2006-07 for Rs 1 lakh and sold it for Rs 5 lakh in 2018-19. So in mathematical terms you made a gain of 4 Lakh. But , when it comes to your capital gains taxation it will be adjusted for the inflation adjustment factor i.e. 280 divided by 122, which is 2.29. By this method, your cost of the investment will be deemed to be higher by 2.29 times than what it actually was, that is, it will be Rs 2.29 lakh. Thus, your profit will be Rs 2.71 lakh and the tax payable will be Rs 54,200.

Interest Income:-
Interest income is simply added to your income and taxed according to whatever tax bracket you are in.

Saving Taxes through Section 80c I am categorically keeping this topic away from this discussion for now and will be shared in Series 2.

It was only last week when my brother’s friend who just landed a lucrative offer through the campus placement met me. He was quite ecstatic. Finally after years of burning the midnight lamp’s oil he was going to get his first paycheck. No more pocket money issues, no udhaars/Karz (loans from friends). Just as we celebrated his success I asked him rather a serious question. How do you plan to invest for your future? The answer he gave was rather quite common which still plagues millions of new investors like –

If one starts early the chances of making a substantial long-term wealth is quite high. In my earlier blog on Achint’s style of passive investing I dwelled on this point (Please refer to the earlier blog posted on compounding returns the following link https://simplifiedmoneytalks.wordpress.com/2019/10/11/how-to-multiply-your-money/). At the start of one’s career just when you start getting your paychecks, the ‘SAVINGS’ bit tends to take a back seat. To cater to this carefree attitude, I would suggest the easiest way of saving is to create a systematic investment plan at the beginning of every month. By applying such a method – your savings will be taken care of even before any spending takes off. By its very design, a SIP will also impart the discipline of investing and average out your investment costs.

This is the story of 2 different young investors.

Story of Achint and My Cousin’s Sister:

• Achint’s Journey:
  • Starting Age: 23 years old.
  • Education: Reputed B School, Master’s in Finance.
  • Investment: ₹3,000 per month.
  • Investment Duration: From age 23 to 58 (35 years or 420 months).
  • Interest Rate: 11.5% per annum.
  • Final Amount: ₹1.68 Crores.
• My Cousin’s Sister’s Journey:
  • Starting Age: 30 years old.
  • Investment: ₹3,000 per month.
  • Investment Duration: From age 30 to 58 (28 years or 336 months).
  • Interest Rate: 6.5% per annum (through recurring deposits).
  • Final Amount: ₹28.47 Lakhs.

 The Staggering Difference: Achint accumulated significantly more wealth than my cousin’s sister. The difference is ₹1.39 Crores (₹1.68 Crores – ₹28.47 Lakhs).

 Key Takeaway: The earlier you start investing, the more wealth you can accumulate. This is due to the power of compounding, which allows your money to grow exponentially over time.

Now lets understand why this happened or I should say let’s understand Compounding:

What is Compounding? Compounding is a powerful financial principle where the interest you earn on your initial investment also earns interest over time. This creates a multiplier effect, leading to exponential growth of your investment.

Example of Compounding:

• Interest Rate: 6.5% per annum (typical for recurring deposits).
• Investment: ₹3,000 per month.
• Duration: 20 years.
• Final Amount: ₹14.71 Lakhs.
• Higher Interest Rate Example:
  • Interest Rate: 11.5% per annum (typical for a good diversified mutual fund).
  • Investment: ₹3,000 per month.
  • Duration: 20 years.
  • Final Amount: ₹27.75 Lakhs.

Impact of Interest Rate: A 5% difference in the interest rate can result in a difference of ₹13.04 Lakhs over 20 years.

Now understand the long-term investment strategy:

How Compounding Works in Mutual Funds: When you invest in a mutual fund, compounding allows you to earn interest on both your principal and the returns you re-invest. This means your returns generate additional returns, leading to faster growth of your investment.

Example: By re-investing your earnings (interest or dividends), you buy more units of the mutual fund. These additional units also earn returns, further increasing your investment’s value over time.

Start Early and Invest Wisely: To harness the power of compounding, start saving and investing as early as possible. The sooner you begin, the more time your money has to grow, leading to greater wealth accumulation in the long run.

So, act Smart and Start Early.

It’s been quite a while I am sharing my experiences once again. Time flies by and from a market which was booming at large since past few years, suddenly one starts feeling the nerve and the market breakdown seems nearby. We are humans and we tend to react on emotions. The extremes of greed and fear will certainly prevail and one will have to deal with it. There will be extremism and still investors will be coming in hoards and when the chips go down. I met a retired defence personnel who seems to be quite of an optimist way back in 2016- 17 and why not the market was moving in leaps and bounds and his overall portfolio valuations were in double digits and he was quite ecstatic about it. On an evening when we were discussing about the markets and how will the tide turn in the next couple of years, I was quick to respond go slow on your overall small cap and mid cap exposures if you are just looking to redeem in the next 24 months. To this he reacted with quite an optimism. He said buddy the next 36 months the market would grow at the rate of 15 to 20 percent p.a. I won’t blame him for the utter optimism that a bullish market creates on our senses.

Most of the times we forget about the very basics of investing. The time period for which we would want to stay invested in the market. The second one – what do we want to do with that money? You would say what kinda question is that? I would say do you have some goals in the hindsight like in his case – a corpus for your grandchildren, a vacation in few years etc etc.
Why don’t we get mean when it comes to our money? Why not what’s wrong in that? In a really bullish market, we start chasing the best and only to find ourselves gasping for breath, we get ecstatic with the double digit returns and start pumping in more money into the market only to feel sorry when the market turns its ugly head. Same was the case here, after around 2 years the same person had been calling me frantically and asking for suggestions as to what should he do with his mid cap and small cap investments which are at minus 30 percent? Desperate times calls for desperate measures but will that help him now when he is in urgent need of this money. I am not here to provide solutions to anyone in this write up but then the idea that I am trying to draw is for every other investor to understand few basic things before putting in your hard-earned money in the market. Set your emotions aside, stay away from your EGO as it will lead you to a road of Nowhere. Till then Happy investing 😊